There’s no doubt that builders are looking at a unique spring season compared with recent years. The market has changed significantly since mid-2022, when mortgage rates began to climb and economic uncertainty mounted.
When that happened, demand fell off—and has remained relatively low (comparatively speaking) ever since.
“The housing market was chugging along until the combination of higher home prices and mortgage rates both spooked potential home buyers and pushed affordability to the limit for many,” explains Ali Wolf, chief economist at Zonda. “Now, all eyes are on the spring selling season of 2023 to see if consumers return to the market in the typically strong test of the year for housing.”
If they don’t, or at least don’t in large numbers, builders will find themselves in steep competition for the buyers that remain.
Here’s how Russ Stephens, co-founder of the Association of Professional Builders, puts it: “As interest rates continue to rise in 2023, this situation will compound and get worse, leading to more builders competing for less work. Higher interest rates have a massive impact on the construction industry, which means we can expect to see demand remain low for a few years.”
Fortunately, there are ways home builders can weather the potential storm and stay successful, no matter what the market may bring in the coming year. Here’s what Stephens and other industry pros say can help.
1. Renew your focus on marketing and sales
Renewing—or perhaps, revamping—your marketing and sales strategies is the first place to start.
As Stephens explains, “A lot of building companies have neglected their marketing over the past two years, because prospects have been chasing builders. Equally, builders have not had to deal with objections because the market was running so hot. If you owned a building company over the past two years, you could not fail to be busy, even if you had no idea how to sell or market your business.”
This year, things have changed, and builders no longer have the upper hand. Knowing your customers and intentionally marketing, selling, and promoting your homes and communities to them will be critical for success.
Stephens suggests focusing on content marketing “in order to generate quality leads rather than price checkers” and documenting your sales process to ensure repeatable results.
“No matter what happens in the economy, the best companies always win because they attract the best clients,” he explains. “It's the poorly run businesses that are left to fight over the scraps.”
2. Stay competitive and stand out
Ensuring your company stands out from other builders is vital, too, particularly when the pool of available buyers is shrinking.
“During a time of slower sales, most sales and marketing teams are working on strategy to help drum up demand,” Wolf says. “Price cuts and strategic incentives have proved successful in many communities at driving traffic back into sales offices.”
But be careful: Getting buyers back to the sales office doesn’t always mean a done deal.
“The last six months of 2022 saw sales cycles lengthening as consumers dragged their feet during the process,” Stephens says. “We also saw a lot consumers, at contract signing, putting their plans on hold in order to ‘see what happens.’”
To prepare for the fallout of these indecisive buyers, Stephens recommends generating twice as many preliminary prospects as contracts you’d like to close.
“Builders’ sales funnels will be hit hard by prospects who change their mind or cannot get financing, so never rely on six ‘definites’ to sign six contracts,” Stephens says.
3. Branch out in both customer type and strategy
General consumers aren’t builders’ only options for drumming up sales. Increasingly, builders are turning to investors to offload properties and keep sales moving.
In fact, a recent Zonda survey revealed that 47% of builders are selling homes to investors on a one-off basis, while 6% are doing so in bulk.
“Builders are also considering ramping up their build-to-rent portfolio as a perceived ‘recession-proof’ strategy,” Wolf says.
For some, this means selling existing, spec properties to build-to-rent investors. For others, it may mean converting entire communities to a build-to-rent model or working with existing build-to-rent communities as the designated builder or contractor.
“Home builders have maintained strong volume in recent years, and, with home sales slowing, a shift to build-to-rent can provide a pipeline of production to keep their employees and their trades working through a down cycle to maintain continuity for the time when home sales rebound,” says Robert Trujillo, vice president of Harvard FirstStreet at Harvard Investments, a residential and master plan developer based in Scottsdale, Arizona. The company recently branched out to the build-to-rent sector to much success.
“We’re adding build-to-rent to our business plan for the ongoing revenue it provides,” Trujillo says.
A major benefit of this strategy is that the build-to-rent market tends to move differently than the traditional, for-purchase market. So venturing into this arena? It can be a smart way to diversify one’s portfolio and minimize risk.
“We’re not experiencing the slowdown that home builders have experienced in recent months,” says Josh Hartmann, CEO of NexMetro, which builds luxury rental home communities nationwide. “Multifamily has a long history of being a recession-resistant asset class that thrives in good times and bad.”
4. Reduce operating costs and staff
Finally, cutting operational costs can help builders bide time while sales are slow. That may mean reducing office space, particularly for builders with a largely remote workforce, or finding ways to automate processes or increase efficiencies.
Staffing cuts are also an option. Zonda data shows that 18% of home builders have already laid off some staff due to changing market conditions, and about 27% anticipate making further cuts later this year.
As Wolf puts it, “Slower starts and slower sales mean less need for workers.”